Item 1 – Financial Statements (unaudited).

GENAISSANCE PHARMACEUTICALS, INC.

(Unaudited)

(In thousands, except per share data)

	March 31,			December 31,
	2005			2004

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,880		$	9,174
Restricted cash	224			213
Accounts receivable and unbilled revenue, net	4,256			4,251
Taxes receivable	685			652
Inventory	661			606
Other current assets	935			1,020

Total current assets	12,641			15,916

PROPERTY AND EQUIPMENT, net	8,601			9,182
DEFERRED FINANCING COSTS, net	211			216
INVESTMENT IN AFFILIATE	1,186			1,186
GOODWILL	12,286			12,286
OTHER INTANGIBLES, net	11,003			11,153
OTHER ASSETS	95			99

Total assets	$	46,023		$	50,038

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	845		$	3,648
Accounts payable	1,722			1,472
Accrued expenses	2,264			2,929
Accrued dividends	1,207			1,260
Current portion of deferred revenue	1,356			1,789

Total current liabilities	7,394			11,098

LONG-TERM LIABILITIES:
Long-term debt, net of current portion	6,050			3,692
Deferred revenue, net of current portion	2,613			2,791
Deferred tax liabilities	1,327			1,327
Other long-term liabilities	2,618			2,330

Total long-term liabilities	12,608			10,140

COMMITMENTS AND CONTINGENCIES (Note 16)

SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK:
460 authorized shares at March 31, 2005 and December 31, 2004; $.001 par value; 460 shares Issued and outstanding at March 31, 2005 and December 31, 2004 (liquidation preference $10,350 at March 31, 2005)	9,783			9,698

STOCKHOLDERS’ EQUITY:
Preferred stock, 540 authorized shares at March 31, 2005 and December 31, 2004; no shares issued or outstanding except for series A included above	—			—
Common stock, 58,000 authorized shares at March 31, 2005 and December 31, 2004; $.001 par value; 35,343 and 34,708 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively	35			35
Additional paid-in capital	253,992			252,945
Accumulated deficit	(236,651		)	(233,522		)
Deferred compensation	(1,119		)	(374		)
Accumulated other comprehensive income (loss)	(19		)	18

Total stockholders’ equity	16,238			19,102

Total liabilities, redeemable convertible preferred stock, and stockholders’ equity	$	46,023		$	50,038

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENAISSANCE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

	Three Months Ended
	March 31,
	2005			2004

REVENUES:
License and research	$	2,853		$	2,868
Laboratory services	2,735			860

Total revenue	5,588			3,728

OPERATING EXPENSES:
Cost of laboratory services	2,027			861
Research and development	3,301			5,012
Selling, general and administrative	3,240			2,358

Total operating expenses	8,568			8,231

Loss from operations	(2,980		)	(4,503		)

OTHER INCOME (EXPENSE):
Other income	34			75
Interest expense	(157		)	(180		)

Loss before income taxes and equity in loss of affiliate	(3,103		)	(4,608		)

Income tax (expense) benefit	(26		)	49

Loss before equity in loss of affiliate	(3,129		)	(4,559		)

Equity in loss of affiliate	—			(150		)

Net loss	(3,129		)	(4,709		)

PREFERRED STOCK DIVIDENDS AND ACCRETION	(136		)	(110		)
BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK AND WARRANT	—			(6		)

Net loss applicable to common stockholders	$	(3,265	)	$	(4,825	)

Net loss per common share, basic and diluted	$	(0.09	)	$	(0.21	)

Weighted average shares used in computing net loss per common share	34,629			23,194

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENAISSANCE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended
	March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,129	)	$	(4,709	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	903			1,552
Stock-based compensation	396			87
Non-cash service and license expense paid with stock	—			31
Equity in loss of affiliate	—			150
Changes in assets and liabilities:
Accounts receivable	(5		)	248
Taxes receivable	(33		)	(55		)
Inventory and other current assets	(20		)	(325		)
Other assets	—			(727		)
Accounts payable	250			464
Accrued expenses	(660		)	(1,403		)
Deferred revenue	(611		)	268
Other long-term liabilities	288			—
Net cash used in operating activities	(2,621		)	(4,419		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(98		)	(410		)
Investment in affiliate	—			(38		)
Increase in restricted cash	(11		)	—
Proceeds from sales of marketable securities	—			2,650
Net cash (used in) provided by investing activities	(109		)	2,202

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock	42			15
Repayment of long-term debt	(445		)	(506		)
Financing costs	(20		)	—
Preferred stock dividends paid	(104		)	(23		)
Net cash used in financing activities	(527		)	(514		)

Effect of exchange rate changes on cash	(37		)	—

NET DECREASE IN CASH AND CASH EQUIVALENTS	(3,294		)	(2,731		)

CASH AND CASH EQUIVALENTS, beginning of period	9,174			8,033

CASH AND CASH EQUIVALENTS, end of period	$	5,880		$	5,302

SUPPLEMENTAL DISCLOSURE AND NON-CASH ACTIVITIES:
Interest paid	$	109		$	172
Income taxes paid	$	—		$	6
Issuance of restricted shares, net of forfeitures	$	1,118		$	—
Issuance of common stock for services and licenses	$	—		$	31

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENAISSANCE PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Quarter Ended March 31, 2005

(Amounts in thousands, except per share data)

(1) BASIS OF PRESENTATION

Genaissance Pharmaceuticals, Inc., together with its subsidiary, Lark Technologies, Inc. (Genaissance or the Company), develops innovative products based on its proprietary pharmacogenomic technology and has a revenue-generating business in DNA and pharmacogenomic products and services. The Company also markets its proprietary FAMILION Test, a genetic test for cardiac channelopathies that is compliant with the Clinical Laboratory Improvement Amendments, or CLIA. The FAMILION Test is designed to detect mutations responsible for causing familial Long QT (LQT) and Brugada Syndromes, two causes of sudden cardiac death. The Company’s product development strategy is focused on drug candidates with promising clinical profiles and finding genetic markers to identify a responsive patient population. This strategy is designed to enable the Company to leverage existing clinical data and, thus, reduce the costs and risks associated with traditional drug development and increase the probability of clinical success and commercialization. The Company’s lead therapeutic product, vilazodone for depression, is in Phase II of development.

The accompanying condensed consolidated financial statements of the Company were prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and related footnotes for the year ended December 31, 2004, included in its Annual Report on Form 10-K (File No. 000-30981). The unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, including the elimination of all significant intercompany transactions, which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2005, and the results of its operations for the three months ended March 31, 2005 and 2004, respectively. The results of operations for such interim periods are not necessarily indicative of the results to be achieved for the full year.

The Company believes that its current cash balance and the funds generated from operations will be sufficient to cover anticipated cash needs through at least the next 12 months, except with respect to funds required for the clinical development of vilazodone. The Company’s current business plan reflects continued initiatives to increase revenue, reduce cost of laboratory services as a percentage of revenue, reduce research and development expenses and control selling, general and administrative costs. If the Company is unable to achieve revenue and cost targets within a reasonable range of its operating plan, the Company will need to raise additional funds through the public or private sale of its equity or debt securities or from other sources, in order to satisfy its projected cash needs. Further, the Company is also reviewing various alternatives to finance its ongoing operations and meet its obligations, including potentially reorganizing the Company, disposing of some of its assets, exploring strategic alternatives, such as a potential sale of the Company, developing strategic alliances and/or joint development arrangements. There is no assurance that the Company will be able to obtain sufficient financing on acceptable terms, if at all.

The Company operates in an environment of rapid change in technology and has substantial competition from companies developing genomic related technologies. In addition to the normal risks associated with a business venture, there can be no assurance that the Company’s technologies will be successfully used, that the Company will obtain adequate patent protection for its technologies and that any of its products will be commercially viable. The Company has incurred substantial losses to date and expects to incur substantial expenditures in the foreseeable future to fund its research and development and commercialization of its products.

(2) ORGANIZATION, OPERATIONS AND RECENT DEVELOPMENTS

In April 2005, the Company entered into a Note and Warrant Purchase Agreement with Xmark Opportunity Fund, Ltd., Xmark Opportunity Fund, L.P. and Xmark JV Investment Partners, LLC (collectively Xmark), pursuant to which, among other things, the Company issued Notes (collectively Note) to Xmark in the aggregate principal amount of $4,500. The Note is secured by substantially all of the Company’s assets, excluding, among other assets, the Company’s intellectual property. In addition, the Company issued Xmark warrants to purchase an aggregate of 2,000 shares of the Company's common stock at an exercise price of $2.25 per share. Concurrent with signing the Note, the Company terminated its Loan and Security Agreement with Comerica Bank N.A. (Comerica) and repaid all outstanding principal and interest due to Comerica. The Note is payable on April 21, 2007. As a result of these transactions, the Company has classified the Comerica debt as long-term in the accompanying condensed consolidated balance sheet as of March 31, 2005. See Note 17 for further discussion of the Note.

In November 2004, the Company reduced its workforce by approximately 10% to align better its operating structure with its current and projected revenues and reduced expenses in certain other areas. The Company took a charge of approximately $400 in the fourth quarter of 2004, primarily relating to severance obligations in connection with this workforce reduction.

In September 2004, the Company entered into a license, development and cooperation agreement with Merck KgaA (Merck) pursuant to which the Company acquired an exclusive worldwide license from Merck to develop and commercialize vilazodone, a small molecule compound. In consideration for the rights relating to vilazodone, the Company agreed to pay an initial license fee in shares of the Company’s common stock and milestone payments upon the achievement of specified development, regulatory and sales milestones. Under the terms of the agreement, the Company can pay the initial license fee and milestone payments, until the first commercial sale of vilazodone, through the issuance of its common stock. The Company issued 369 shares of its common stock to Merck in payment of the initial license fee. Under the terms of the agreement, if Merck and its affiliates’ aggregate ownership of the Company’s common stock would exceed 19.9% of the number of shares of its common stock then outstanding, or if the average closing price of the Company’s common stock at the time of the respective payment date is below $2.25 per share, the Company is required to make milestone payments to Merck in cash. In addition, the agreement requires that the Company demonstrate its ability to fund the initial research and development activities by July 22, 2005 or Merck may terminate the agreement and reacquire rights to vilazodone. Pursuant to the terms of the agreement, Merck is entitled to royalties on all future product sales and a share of all sub-licensing income from any third party. The Company is reviewing its alternatives in connection with obtaining the financing required to conduct initial research and development related activities under the Merck agreement.

In April 2004, the Company acquired Lark Technologies, Inc. (Lark) in a stock-for-stock merger such that Lark became a wholly-owned subsidiary of the Company. Lark provides Good Laboratory Practices (GLP) compliant and research sequencing and related molecular biology services to the pharmaceutical, biotechnology and agbio industries at its facilities in Houston, Texas and the United Kingdom. Lark’s service portfolio consists of over 100 different molecular biology services in the areas of nucleic acid extraction, DNA sequencing, genetic stability testing, gene expression and detection as well as other custom services. See Note 3 for further discussion of the Lark acquisition.

(3) ACQUISITION OF LARK TECHNOLOGIES

On April 1, 2004, Genaissance acquired Lark in a stock-for-stock merger accounted for as a purchase transaction. The total cost of the acquisition was approximately $24,486. The purchase price was allocated to the tangible and identifiable intangible assets of Lark acquired by Genaissance and the liabilities assumed by Genaissance on the basis of their fair values on the acquisition date.

The results of operations of Lark are included in the Company’s condensed consolidated statements of operations since the date of acquisition. Supplemental pro forma disclosure of results of operations for the three months ended March 31, 2004 as though the merger had been completed as of January 1, 2004, are as follows:

Revenue	$	5,589
Operating loss	(5,349		)
Net loss attributable to common stockholders	(5,697		)
Earnings per share	$	(0.22	)

The financial statements of the Company’s U.K. facility are measured using the local currency as the functional currency. Assets and liabilities of the U.K. facility are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are recorded in a separate component of stockholders’ equity included in other comprehensive income (loss) (see Note 14). Income and expense items are translated at average monthly rates of exchange.

Laboratory services revenue for the U.K. facility totaled approximately $485 for the three months ended March 31, 2005.

(4) EARNINGS PER SHARE

The Company computes and presents net loss per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. There is no difference in basic and diluted net loss per common share as the effect of the convertible preferred stock, stock options and warrants would be anti-dilutive for all periods presented. The outstanding convertible preferred stock, stock options and warrants (prior to application of the treasury stock method) would entitle holders to acquire 14,565 and 9,320 shares of common stock at March 31, 2005 and 2004, respectively.

(5) DEFERRED COMPENSATION

In January 2005, the Company issued 527 shares of restricted stock to certain of its employees under its 2000 Amended and Restated Equity Incentive Plan. The shares of restricted stock vest fully in February 2006. The Company recorded deferred compensation based on the fair market value of the stock on the date of grant and is recognizing the expense, net of cancellations, ratably over the period from the date of grant to the vesting date.

(6) REVENUE RECOGNITION

The Company earns its revenues primarily through the licensing of its HAP Technology and by providing molecular biology services. The Company recognizes revenue associated with molecular biology services, which are included in laboratory service revenue in the accompanying condensed consolidated statements of operations, in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (which supercedes SAB No. 101, Revenue Recognition in Financial Statements) as the services are performed provided that persuasive evidence of an arrangement exists, the price is fixed and determinable and collectibility is reasonably assured.

In accordance with SAB No. 104 and Emerging Issues Task Force Issue 00-21, the Company generally recognizes license fees over the term of the agreement and research fees as the research is performed. For agreements with multiple deliverables, revenue is not recognized unless the fair value of the undelivered elements can be determined and the elements delivered have stand-alone value to the customer. Future milestones and royalties received under these agreements, if any, will be recognized, provided that the milestone is substantive and a culmination of the earnings process has occurred.

Deferred revenue results when consideration is received or amounts are receivable in advance of revenue recognition. Deferred revenue related to license agreements is generally recognized over the license period. For license agreements, which contain early termination provisions, the Company recognizes revenue upon the expiration of the termination provision for the period from the original license date to the date the early termination provisions expire.

(7) RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. The new rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued. In April 2005, the SEC announced a deferral of the effective date of SFAS No. 123(R) to be the first annual reporting period starting after December 15, 2005. The Company routinely uses share-based payment arrangements as compensation for its employees. The Company is in the process of evaluating the impact the adoption of SFAS No. 123(R) but believes it will have a material impact on its condensed consolidated financial statements. See Note 9 for the effect on net income for the three months ended March 31, 2005 and 2004.

(8) GOODWILL AND INTANGIBLE ASSETS

Goodwill and identifiable intangible assets recorded in the condensed consolidated balance sheet of the Company are comprised of the following as of March 31, 2005:

	Gross		Accumulated
	Amount		Amortization
Amortizable intangible assets:
Patents acquired	$	868	$	(222	)
Lark customer relationships	7,200		(480		)

Unamortizable intangible assets:
Lark trade name	3,500		—
Lark GLP certification	137		—
Lark goodwill	12,286		—

Total	$	23,991	$	(702	)

Amortization expense was approximately $151 and $30 for the three months ended March 31, 2005 and 2004, respectively.

The expected amortization expense for the current and each of the next four years is as follows:

Fiscal 2005	$	599
Fiscal 2006	599
Fiscal 2007	599
Fiscal 2008	559
Fiscal 2009	535

(9) ACCOUNTING FOR STOCK-BASED COMPENSATION

At March 31, 2005, the Company had one stock-based compensation plan, which is accounted for under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.

The following table illustrates the effect on net income and earnings per share, if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the three months ended March 31, 2005 and 2004, respectively:

	Three Months Ended
	March 31,
	2005			2004

Net loss applicable to common shareholders, as reported	$	(3,265	)	$	(4,825	)
Add: Stock-based employee compensation expense included in reported net loss	23			39
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards	(535		)	(449		)
Pro forma net loss applicable to common shareholders	$	(3,777	)	$	(5,235	)

Net loss per share:
Basic and diluted - as reported	$	(0.09	)	$	(0.21	)

Basic and diluted - pro forma	$	(0.11	)	$	(0.23	)

(10) SIGNIFICANT CUSTOMERS

For the three months ended March 31, 2005, revenue from Pfizer, Inc. (Pfizer) accounted for 20% of the Company’s total revenue. For the three months ended March 31, 2004, revenue from Pfizer, Johnson & Johnson Pharmaceutical Research and Development (J&J PRD) and Millennium Pharmaceuticals, Inc. accounted for 38%, 16% and 10% of the Company’s total revenue. The collaboration agreement with J&J PRD expired in the first quarter of 2004, which accounted for approximately $600 of revenue recognized during the three months ended March 31, 2004.

(11) INVESTMENT IN AFFILIATE

In November 2003, the Company entered into several agreements with Sciona Inc. (Sciona, formerly known as Sciona Limited), whereby the Company granted a technology license to Sciona (Technology License) in exchange for a 37% equity interest (30% on a fully diluted basis) in Sciona (Investment). In September 2004, Sciona closed an equity financing, which diluted the Company’s holdings to 13% (11% on a fully diluted basis). As a result, the Company changed its method of accounting for the investment from the equity method to the cost method, and the Company no longer records its percentage interest in the results of operations of Sciona. In February 2005, Sciona closed an additional equity financing, which further diluted the Company’s holdings to 9% (7% on a fully diluted basis). The Technology License grants Sciona an exclusive license to the Company’s HAP Technology for consumer tests, as defined in the Technology License, for a period of five years. Sciona is obligated to pay to the Company specified royalties and service fees, subject to minimum payments. The Company was also granted specified rights to develop genotyping assays and perform genetic tests.

Deferred revenue resulting from the Technology License and the accompanying investment were recorded based upon the approximate $2,600 estimated fair value of the equity in Sciona as of the date of the Technology License. The excess of the Investment, over the underlying fair value of the net assets of Sciona, is considered to be unamortizable goodwill. Deferred revenue is being amortized into income over the term of the Technology License. The accompanying condensed consolidated statements of operations include approximately $127 of license and research revenue recognized from the amortization of deferred revenue during the three months ended March 31, 2005. The revenue recognized represents the ratable portion of the Technology License fee for the three months ended March 31, 2005, as a result of Sciona meeting the Sciona Milestones. Also, included in the accompanying condensed consolidated statements of operations, for the three months ended March 31, 2005 and 2004, are approximately $375 and $47, respectively, of license and research revenues related to Sciona.

(12) LONG-TERM DEBT

The Company entered into financing agreements (the Agreements) with Connecticut Innovations, Inc., a stockholder of the Company, to finance certain leasehold improvements and other costs associated with the Company’s facility expansion in New Haven. The Agreements provide for payments of principal and interest based on a 120-month amortization, with final balloon payments due in March 2009 through June 2011. Borrowings under the Agreements are collateralized by the related leasehold improvements. Management believes that the Company is in compliance with all covenants under the Agreements as of March 31, 2005 and the Agreements do not contain any cross default provisions.

In September 2003, the Company entered into a $5,000 Loan and Security Agreement with Comerica, which was subsequently terminated with all outstanding principal and interest being repaid in April 2005 (See Note 17). Under the terms of the agreement, the Company was required to satisfy certain financial covenants, including a minimum cash balance and a minimum quick ratio, as defined. Due to the uncertainty surrounding future debt covenant compliance at December 31, 2004, the Company classified the Comerica debt as current in the accompanying condensed consolidated balance sheet as of December 31, 2004.

On April 21, 2005, the Company entered into a Note and Warrant Purchase Agreement with Xmark, pursuant to which, among other things, the Company issued the Note to Xmark in the aggregate principal amount of $4,500. The Note, which is payable on April 21, 2007, bears interest at 5% and is secured by substantially all of the Company’s assets, excluding, among other assets, the Company’s intellectual property. Under the terms of the Note, the Company is required to prepay the Note upon the occurrence of certain events including the sale of the Company’s assets, as defined. In addition, the Company issued Xmark warrants to purchase an aggregate of 2,000 shares of the Company’s common stock at an exercise price of $2.25 per share. The price per share is subject to adjustment in certain circumstances while there is a balance outstanding under the Note on or after September 18, 2005 and the Company issues specified securities for less than $2.25 per share. The warrants also provide for an adjustment to the exercise price and number and type of securities purchasable upon exercise of the warrant in certain circumstances, including, without limitation, a split-up or combination of shares or a consolidation or merger where the Company is not the surviving entity. Concurrent with signing the Note, the Company terminated its Loan and Security Agreement with Comerica and repaid all outstanding principal and interest due to Comerica. As a result of these transactions, the Company has classified the Comerica debt as long-term in the accompanying condensed consolidated balance sheet as of March 31, 2005.

(13) PREFERRED STOCK

In October 2003, the Company sold 270 shares of series A preferred stock (Series A), $0.001 par value per share, to RAM Trading, Ltd. (RAM) for $22.50 per share, resulting in proceeds of approximately $5,925, net of issuance costs of approximately $150. In connection therewith, the Company issued RAM a warrant to purchase an additional 190 shares of Series A through December 31, 2005, at $22.50 per share, which RAM exercised on June 30, 2004, resulting in gross proceeds to the Company of $4,275. In connection with the exercise of the warrant, the Company granted an affiliate of RAM a warrant to purchase approximately 262 shares of common stock at the then fair market value of $4.17 per share.

The Series A shares and the Series A warrant were initially recorded at their relative fair market values of approximately $5,195 and $880, respectively. As a result of the put rights discussed below, the difference in the stated value and the carrying value of the Series A, resulting from the allocation of the proceeds and the issuance costs, is being accreted through the earliest Put Date (as defined below) using the effective interest rate method. This accretion results in a higher effective dividend and is reflected in net loss applicable to common stockholders in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2005.

The rights of the Series A holders are as follows:

• Voting Rights – the holders of Series A are entitled to vote on all matters and are entitled to 0.88 votes per common equivalent share to comply with certain NASDAQ Marketplace rules.

• Dividend Rights – the Series A earns a dividend at the rate of 2% per annum payable in cash in arrears semi-annually in January and July. Included in accrued dividends in the accompanying condensed consolidated balance sheets as of March 31, 2005 and 2004 is approximately $48 and $29, respectively, related to the Series A dividends.

• Conversion Rights – each share of Series A is convertible into ten shares of common stock at the option of the holder. On or after October 29, 2006, the Company can require the conversion of the Series A if the common stock has traded above $7.00 for 23 consecutive business days.

• Redemption Rights – under the terms of the Series A, the Company is required to redeem, unless the holders of at least 66-2/3% of the Series A elect otherwise, all of the outstanding shares of Series A if a significant event, as defined, occurs or the Company breaches certain covenants. The redemption value is the original stated purchase price of $22.50 per share, plus accrued but unpaid dividends. A significant event is generally defined as a dissolution of the Company or the sale of the Company or substantially all of its assets. If the significant event or breach occurs prior to October 29, 2008, the face value plus all of the unpaid cash dividends through October 29, 2008 also become payable (approximately $11,139 at March 31, 2005). In addition, RAM has the option to require that the Company redeem all of the outstanding shares of Series A on either October 29, 2006, 2007 or 2008 (the Put Dates). Genaissance may delay such payment for up to one year, in which case the dividend rate would increase to 10% per annum.

In connection with the issuance of the Series A, the Company is required to maintain certain covenants. The most significant of these covenants restricts the Company from: (i) incurring indebtedness in excess of $9,000; (ii) paying dividends on its common stock; and (iii) redeeming most of its equity securities. Management believes that the Company was in compliance with these covenants as of March 31, 2005.

In June 2004, RAM agreed not to convert its Series A if such conversion would cause RAM, together with RAM’s affiliates, to beneficially own in excess of 9.99% of the Company’s common stock.

(14) COMPREHENSIVE INCOME (LOSS)

The Company reports comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and the display of comprehensive income (loss) and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period other than transactions with owners. The Company’s other comprehensive income (loss) arises from net unrealized gains (losses) on marketable securities and foreign currency translation gains (losses).

A summary of total comprehensive loss is as follows:

	Three Months Ended
	March 31,
	2005			2004

Net loss attributable to common stockholders	$	(3,265	)	$	(4,825	)
Other comprehensive income (loss)	(19		)	18
Total comprehensive loss	$	(3,284	)	$	(4,807	)

(15) INCOME TAXES

The State of Connecticut (the State) allows companies conducting business in the State to receive cash refunds from the State at a rate of 65% of their qualifying research and development tax credit, as defined, in exchange for foregoing the carryforward of the research and development tax credit. In the three months ended March 31, 2005 and 2004, the Company recorded an estimated benefit of approximately $33 and $55, respectively, related to the State exchange program, which is offset by foreign and state tax expense.

Included in deferred tax liabilities in the accompanying condensed consolidated balance sheets are Federal and state deferred tax liabilities of approximately $1,236 and $91, respectively, which were established as a result of the purchase price allocation for the tax effects of temporary differences in amortization of intangible assets acquired in the Lark acquisition.

(16) COMMITMENTS AND CONTINGENCIES

In the ordinary course of its business, the Company enters into agreements with third parties that include indemnification provisions, which, in the Company’s judgment, are normal and customary for companies in its industry sector. These agreements are typically with business partners, clinical sites and suppliers. Pursuant to these agreements, the Company generally agrees to indemnify, hold harmless, and reimburse the indemnified parties for losses suffered or incurred by the indemnified parties with respect to the Company’s products or product candidates, use of such products or other actions taken or omitted by the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. Since the date of its incorporation, the Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the current estimated fair value of liabilities relating to these provisions is minimal. Accordingly, the Company has not recorded a liability for these provisions as of March 31, 2005.

The Company periodically enters into agreements with third parties to obtain exclusive or non-exclusive licenses for certain technologies. The terms of certain of these agreements require the Company, among other items, to demonstrate the ability to fund certain research and development and commercialization activities, pay future royalty payments and pay certain milestone payments based on product sales or sublicense income generated from applicable technologies, if any. The timing of such events and the amount of such payments will depend upon successful commercialization of applicable technologies, if any.

Under the terms of the license, development and cooperation agreement the Company signed with Merck in September 2004, the Company agreed to pay milestone payments upon the achievement of specified development, regulatory and sales milestones and royalties on all future product sales and a share of all sub-licensing income from any third party on the commercialization of vilazodone. To date the Company has not made any milestone or royalty payments to Merck. Under the agreement, the Company is required to demonstrate that by no later than July 22, 2005, it will have at least $8,000 in financing or have shown the capacity to fund such levels of research and development activities in 2005 relating to vilazodone. If the Company is unable to meet this requirement, Merck can terminate the agreement and reacquire the compound. In addition, if Merck and its affiliates’ aggregate ownership of the Company’s common stock would exceed 19.9% of the number of shares of the Company’s common stock then outstanding, or if the average closing price of the common stock at the time of the respective payment date is below $2.25 per share, the Company will pay milestone payments to Merck in cash.

(17) SUBSEQUENT EVENT

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to the historical information, the discussion in this Quarterly Report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to the factors set forth under “Factors Affecting Future Operating Results” below and elsewhere in this Quarterly Report.

Common Terms

We use the following terms in this Management’s Discussion and Analysis of Financial Condition and Results of Operations:

HAP Technology – the key components of our HAP Technology are:

• a proprietary informatics system, which we call DecoGen, including unique algorithms for defining patient populations with different drug responses;

• a database, which we call the HAP Database, of highly informative, proprietary measures of genetic variation, or haplotypes, which we call HAP Markers, for pharmaceutically relevant genes;

• a cost-effective, efficient process for determining genomic variation in clinical DNA samples, genotyping;

• and clinical genetics development skills.

Cardiac Channelopathies program – this program was designed to develop a CLIA compliant, genetic test for detecting cardiac ion channel mutations. Cardiac channelopathies, including familial LQT and Brugada Syndromes, are conditions that affect the electrical system of the heart. These conditions are caused by genetic mutations that result in structural abnormalities in the potassium and sodium channels of the heart and predispose affected individuals to abnormal heart rhythm, or arrhythmia. Familial LQT and Brugada Syndromes are commonly seen in apparently healthy, active adolescent patients. If left undiagnosed and untreated, these conditions can be fatal. In May 2004, we launched our FAMILION Test, which is a CLIA compliant genetic test for cardiac channelopathies. We will also seek to discover genetic markers that are predictive of drug-induced QT prolongation and arrhythmias, and arrhythmias that occur in patients with other disorders such as congestive heart failure.

CARING program (Clozapine and Agranulocytosis Relationships Investigated by Genetics (HAP Markers)) – this program was designed to identify which of our HAP Markers define the patients who are most likely to develop agranulocytosis, a potentially life-threatening depletion of white blood cells, if treated with clozapine. In December 2004, we reported the discovery of genetic markers that we believe predict who is at risk of developing clozapine-induced agranulocytosis. We believe that the findings may apply to other drugs that also affect white blood cell counts.

STRENGTH program (Statin Response Examined by Genetic HAP Markers) – this program was designed to apply our HAP Technology and our clinical genetics development skills to the statin class of drugs, which doctors use to treat patients with high cholesterol and lipid levels and who are, therefore, at risk for cardiovascular disease.

Vilazodone program – this program is designed to identify genetic markers that define patients who are most likely to respond to vilazodone, a small molecule compound we licensed from Merck KGaA (Merck), which is under development for the treatment of depression.

Proprietary Programs – the five programs described above are referred to collectively as our proprietary programs.

Molecular Biology Services – these DNA-based analytical services include Good Laboratory Practices (GLP) compliant DNA isolation and banking and research and GLP compliant sequencing, genotyping and related services.

Overview

We develop innovative products based on our proprietary pharmacogenomic technology and have a revenue-generating business in DNA and pharmacogenomic products and services. We also market our proprietary FAMILION Test, a CLIA compliant genetic test for cardiac channelopathies, which is designed to detect mutations responsible for causing familial LQT and Brugada Syndromes, two causes of sudden cardiac death. Our product development strategy is focused on drug candidates with promising clinical profiles and finding genetic markers to identify a responsive patient population. This strategy is designed to enable us to leverage existing clinical data and, thus, reduce the costs and risks associated with traditional drug development and increase the probability of clinical success and commercialization. The Company’s lead therapeutic product, vilazodone for depression, is in Phase II of development.

As of March 31, 2005, we had a total of 7,777 genes in our database, with 34 of these genes having been added during the three months ended March 31, 2005, and 31 genes having been added during the three months ended March 31, 2004. There is not necessarily any correlation between the costs incurred in any period and the number of genes added to the database in that period. This is due to the fact that the size of the gene and, therefore, the amount of work involved varies from gene to gene. In addition, after a gene is sequenced, it must be analyzed and go through an internal quality assurance check before it is added to the database. This process may cause a gene sequenced in one period to be added to the database in a different period. Furthermore, since additional information about genes continues to be discovered, we may resequence genes previously included in the database and/or perform further quality assurance analysis.

Since our inception, we have incurred significant operating losses, and, as of March 31, 2005, we had an accumulated deficit of approximately $236.7 million. The majority of our operating losses have resulted from costs we incurred developing our HAP Technology, in our clinical trials and from administrative costs associated with operations. As part of our HAP Technology program, we continue to populate our database with HAP Marker information for pharmaceutically relevant genes, but we do so only when information that we need is not then currently available in our HAP Database. We expect to dedicate a significant portion of our resources for the foreseeable future to continue the development of our proprietary programs and service our proprietary programs and molecular biology services customers. To date, our revenue has been primarily from licensing and service fees from our agreements with Biogen Idec, Inc., Gene Logic, Inc., Johnson & Johnson Pharmaceutical Research & Development (J&J PRD), Millennium Pharmaceuticals, Inc. (Millennium), Pfizer, Inc. (Pfizer) and Wayne State University and from the molecular biology services that we offer. The collaboration agreement with J&J PRD expired in the first quarter of 2004.

We are completing a strategic review of our operations, including reducing our operating costs. Further, we are also reviewing various alternatives to finance our ongoing operations and meet our obligations, including a potential reorganization, disposing of some of our assets, exploring strategic alternatives, such as a potential sale of the Company, developing strategic alliances and/or joint development arrangements. There is no assurance that we will be able to obtain sufficient financing on acceptable terms, if at all, or cure or waive any future non-compliance with the terms of our financing arrangements.

Financing Activities

On April 21, 2005, we entered into a Note and Warrant Purchase Agreement with Xmark Opportunity Fund, Ltd., Xmark Opportunity Fund, L.P. and Xmark JV Investment Partners, LLC (collectively Xmark), pursuant to which, among other things, we issued Notes (collectively Note) to Xmark in the aggregate principal amount of $4.5 million. The Note, which is payable on April 21, 2007, bears interest at 5% and is secured by substantially all of our assets, excluding, among other assets, our intellectual property. Under the terms of the Note, we are required to prepay the Note upon the occurrence of certain events including the sale of our assets, as defined. In addition, we issued Xmark warrants to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $2.25 per share. The price per share is subject to adjustment in certain circumstances while there is a balance outstanding under the Note on or after September 18, 2005 and we issue specified securities for less than $2.25 per share. The warrants also provide for an adjustment to the exercise price and number and type of securities purchasable upon exercise of the warrant in

certain circumstances, including, without limitation, a split-up or combination of shares or a consolidation or merger where we are not the surviving entity. Concurrent with signing the Note, we terminated our Loan and Security Agreement with Comerica Bank N.A. (Comerica) and repaid all outstanding principal and interest due to Comerica. As a result of these transactions, we have classified the Comerica debt as long-term in our condensed consolidated balance sheet as of March 31, 2005.

On November 19, 2004, we sold an aggregate of 3,550,294 shares of our common stock in a private placement for an aggregate price of $6.0 million and net proceeds of approximately $5.4 million, net of issuance costs of approximately $580,000, to certain accredited investors. In addition, we issued the investors warrants, exercisable through November 18, 2009, to purchase an aggregate of 3,550,294 additional shares of common stock at an exercise price of $1.69 per share.

Acquisitions

Lark Technologies, Inc.

We acquired Lark in a stock-for-stock merger that closed on April 1, 2004. In the merger, each Lark stockholder received 1.81 shares of our common stock for each share of Lark common stock held. Immediately following the closing, the former Lark stockholders held approximately 19.2% of our total outstanding shares, assuming the conversion of our preferred stock and the exercise and conversion of our preferred stock warrant then outstanding.

Lark provides contract, GLP compliant and research sequencing and associated molecular services to the pharmaceutical, biotechnology and agricultural industries through its GLP compliant facility in Houston, Texas and its research facility in Takeley, U.K.

We recorded the transaction as a purchase transaction for accounting purposes and allocated the purchase price of approximately $24.5 million to the assets purchased and liabilities assumed based upon their respective fair values. We allocated the excess of the purchase price over the estimated fair market value of the net tangible assets acquired to identified intangibles with estimated useful lives as follows: backlog – one year; customer relationships – 15 years; and GLP certification and trade name – indefinite. The resulting goodwill was approximately $10.8 million. We expect to incur charges for amortization of intangibles of approximately $120,000 per quarter after March 31, 2005.

Our condensed consolidated financial statements include the results of operations and cash flows of Lark from the closing date. Although Lark is contributing positive operating cash flows, we will still incur net losses in the foreseeable future as we continue to develop our proprietary programs. The extent of the benefits received from the acquisition will depend upon how well we are able to obtain operational efficiencies and increased sales from the integration of Lark’s operations and sales force.

DNA Sciences, Inc.

On May 15, 2003, under order of the United States Bankruptcy Court, we acquired certain assets and assumed certain liabilities of DNA Sciences, Inc. for approximately $1.8 million, inclusive of related fees and expenses. The primary assets acquired consisted of:

• a GLP compliant DNA isolation and banking and a GLP compliant and CLIA licensed genotyping services business;

• licenses and patent estates surrounding LQT Syndrome and a TPMT test; and

• certain trade accounts receivable and fixed assets.

By combining DNA Sciences’ offerings of GLP compliant DNA banking and GLP compliant genotyping services with our HAP Technology and high-throughput research genotyping capabilities as well as the services

from Lark, we now provide a broader range of offerings for the application of pharmacogenomics to the clinical development and marketing of drugs.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make judgments, assumptions and estimates that affect our reported assets and liabilities, revenue and expenses, and other information reported in our financial statements and accompanying footnotes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from estimates, sometimes materially. We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where:

• the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

• the impact of the estimates and assumptions on financial condition or operating performance is material.

Our significant accounting policies are more fully described in the Notes to Unaudited Condensed Consolidated Financial Statements section of this Quarterly Report on Form 10-Q and in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. Not all of these significant accounting policies, however, fit the definition of “critical accounting estimates.” We have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to:

• revenue recognition;

• valuation of long-lived assets;

• research and development expenses; and

• goodwill and identifiable intangible assets

described below fit the definition of “critical accounting estimates.”

Revenue recognition. We earn our revenues primarily through the licensing of our HAP Technology and by providing molecular biology services. We recognize revenue associated with molecular biology services in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (which supercedes SAB No. 101, Revenue Recognition in Financial Statements) as the services are performed provided that persuasive evidence of an arrangement exists, the price is fixed and determinable and collectibility is reasonably assured. In accordance with SAB No. 104 and Emerging Issues Task Force Issue 00-21, we generally recognize license fees over the term of the agreement and research fees as the research is performed. For agreements with multiple deliverables, revenue is not recognized unless the fair value of the undelivered elements can be determined and the elements delivered have stand-alone value to the customer. Future milestones and royalties received under these agreements, if any, will be recognized, provided that the milestone is substantive and a culmination of the earnings process has occurred. Deferred revenue results when consideration is received or amounts are receivable in advance of revenue recognition. Deferred revenue related to license agreements is generally recognized over the license period. For license agreements, which contain early termination provisions, we recognize revenue upon the expiration of the termination provision for the period from the original license date to the date the early termination provisions expire.

Valuation of long-lived assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. Factors, which could trigger an impairment review, include:

• a significant adverse change in the extent or manner in which a long-lived asset is being used;

• a significant adverse change in the business climate that could affect the value of a long-lived asset; and

• a significant decrease in the market value of assets.

If we determine that the carrying value of the long-lived assets may not be fully recoverable, based upon the existence of one or more of the above indicators of impairment, we compare the carrying value of the asset group to the undiscounted cash flows we expect to be generated by the group. If the carrying value exceeds the undiscounted cash flows, an impairment charge may be needed. To determine the amount of the impairment charge, we compare the carrying value of the applicable asset group to its fair value. We determine the fair value of the asset group by discounting expected future cash flow using a discount rate that we determined to be commensurate with the risk inherent in our current business. If the fair value is less than the carrying value, such amount is recognized as an impairment charge. If an impairment charge is required in future periods, it could result in a material, non-cash charge in our statement of operations.

Research and development expenses. We record research and development expenses when they are incurred. Research and development expenses include the following major types of costs: salaries and benefits, material and reagent costs, research license fees, clinical trial expenses, depreciation and amortization of laboratory equipment and leasehold improvements and building and utility costs related to research space. We expense clinical trial costs as incurred based on information we receive from third parties and estimates that we make. Our estimates may change as additional information becomes available, which could cause results to vary from period to period.

Goodwill and identifiable intangible assets. We record business combinations under the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These standards require the use of the purchase method of accounting for business combinations, set forth the accounting for the initial recognition of acquired intangible assets and goodwill and describe the accounting subsequent to initial recognition. Under the provisions of these standards, goodwill and intangible assets deemed to have indefinite lives are not subject to amortization. All other intangible assets are amortized over their estimated useful lives. Goodwill and intangible assets are subject to annual impairment tests and will also be tested for impairment between annual tests, if changes in circumstances indicate that the carrying amount may be impaired. This testing compares carrying values to fair values and, if the carrying value of these assets is less than the fair value, an impairment loss is recognized for the amount of the difference. Our evaluation of fair value is based on various analyses including undiscounted cash flow projections.

Results of Operations

Three Months Ended March 31, 2005 and 2004

License and research revenue consists primarily of revenue recognized in connection with the licensing of our HAP Technology and by providing molecular biology services. License and research revenue was approximately $2.9 million for the three months ended March 31, 2005 and 2004. Revenue from licensing our HAP Technology decreased approximately $1.5 million, due mainly to the expiration of our agreement with J&J PRD and a reduction in the data provided under our agreements with Millennium and Pfizer. The collaboration agreement with J&J PRD expired in the first quarter of 2004, which accounted for approximately $600,000 of revenue recognized during the three months ended March 31, 2004. The decrease was offset by increases of approximately $740,000 and $455,000 in revenue recognized from research genotyping and our collaboration with Sciona Inc. (Sciona), respectively, during the three months ended March 31, 2005. In addition, during the three months ended March 31, 2005, we recognized approximately $201,000 in revenue from our FAMILION Test, which we launched in May 2004.

Laboratory services revenue consists of revenue recognized from services provided by our GLP compliant DNA banking and genotyping facility in Morrisville, North Carolina, and GLP compliant sequencing and related molecular biology services provided by Lark, which we acquired in April 2004. Laboratory services revenue increased to approximately $2.7 million for the three months ended March 31, 2005 from approximately $860,000 for the same period in 2004. The increase in laboratory services revenue is attributable to the inclusion of approximately $1.9 million of revenue from Lark during the three months ended March 31, 2005.

Cost of laboratory services consists of payroll and benefits for personnel, materials and reagent costs, depreciation and maintenance and facility-related costs incurred in providing the laboratory services. The cost of laboratory services increased to approximately $2.0 million for the three months ended March 31, 2005 compared to approximately $861,000 for the same period in 2004. The increase is due to the inclusion of approximately $1.2 million of expenses incurred by Lark in the three months ended March 31, 2005. We expect the cost of laboratory services to decrease as a percentage of revenues as our revenues increase because a substantial portion of these costs are fixed costs for operating these facilities.

Research and development expenses consist primarily of payroll and benefits for research and development personnel, materials and reagent costs, depreciation expense and maintenance costs for equipment used for HAP Marker discovery and research genotyping, technology license fees and facility-related costs. We expense our research and development costs as incurred. Research and development costs decreased to approximately $3.3 million for the three months ended March 31, 2005 from approximately $5.0 million for the same period in 2004. A substantial portion of our research and development expenditures are incurred in developing and conducting our proprietary programs. The following is a breakdown of research and development expenses (in thousands):

	Three Months Ended
	March 31,		March 31,
	2005		2004

Payroll and benefits	$	1,420	$	2,090
Depreciation and amortization	320		1,340
Material and reagent costs	790		550
Technology license fees	190		250
Repairs and maintenance	160		140
Stock-based compensation	10		100
Other	411		542

Total	$	3,301	$	5,012

The decrease in research and development expenses for the three months ended March 31, 2005 is primarily attributable to a decrease of approximately $1.0 million in depreciation and amortization and a decrease of approximately $670,000 in payroll and benefits, which were partially offset by an increase of approximately $240,000 in material and reagent costs. The decrease in depreciation and amortization was primarily due to the fact that the majority of our DNA sequencing machines and the related assets became fully depreciated during the quarter ended June 30, 2004. The decrease in payroll and benefits was primarily due to the fact that in November 2004, we reduced our work force by approximately 10% to align better our operating structure with our current and projected revenues and reduced expenses in certain other areas. The majority of the workforce reductions occurred in research and development. The increase in material and reagent costs was primarily due to an increase in research services provided by our research facility and increases related to our FAMILION Test. The development of our proprietary programs will require us to continue to devote substantial resources to research and development expenses in the near future. We currently do not have sufficient resources to continue the development of all of our proprietary programs. Further development of these programs will depend upon our ability to secure sufficient funds in a financing transaction. See “Factors Affecting Future Operating Results” for further discussion.

Selling, general and administrative expenses consist primarily of payroll and benefits for executive, sales, finance and other administrative personnel, as well as facility related costs and outside professional fees incurred in connection with corporate development, general legal and financial matters. Selling, general and administrative expenses increased to approximately $3.2 million for the three months ended March 31, 2005 from approximately

$2.4 million for the same period in 2004. The increase was primarily due to an increase of approximately $555,000 due to the inclusion of Lark in our operations during the three months ended March 31, 2005. Amortization of the intangible assets recognized from the Lark purchase accounted for an additional $170,000 in expense in the three months ended March 31, 2005. Professional fees increased by approximately $111,000 in the three months ended March 31, 2005, primarily due to an increase in professional and consulting fees incurred in connection with the evaluation of our internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002.

Other income decreased to approximately $34,000 for the three months ended March 31, 2005 from income of approximately $75,000 for the same period in 2004. The decrease was primarily due to a decrease in interest income as a result of higher cash, cash equivalents and short-term investment balances in 2004.

Interest expense decreased to approximately $157,000 for the three months ended March 31, 2005 from approximately $180,000 for the same period in 2004. The decrease was primarily due to lower debt balances in 2005.

Income tax (expense) benefit decreased to an expense of approximately $26,000 for the three months ended March 31, 2005 from a benefit of approximately $49,000 for the same period in 2004. We recorded estimated foreign and state taxes of approximately $59,000 and $6,000 recorded in the three months ended March 31, 2005 and 2004, respectively. The expense is offset by a net tax benefit from the State of Connecticut (the State) as a result of legislation, which allows companies conducting business in the State to receive cash refunds from the State at a rate of 65% of their qualifying research and development tax credit, as defined, in exchange for foregoing the carryforward of the research and development tax credit.

Equity in loss of affiliate represents our percentage interest in the losses of Sciona. The loss was $150,000 in the three months ended March 31, 2004. In November 2003, we granted Sciona a license to our HAP Technology in exchange for a 37% equity interest (30% on a fully diluted basis). In September 2004, Sciona closed an equity financing, which diluted our holdings to 13% (11% on a fully diluted basis). As a result, we changed our method of accounting for the investment from the equity method to the cost method, and we no longer record our percentage interest in the results of operations of Sciona. In February 2005, Sciona closed an additional equity financing, which further diluted our holdings to 9% (7% on a fully diluted basis).

Liquidity and Capital Resources

Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of capital expenditures, working capital, debt service, research and development expenses, general corporate expenses and expenses related to acquisitions.

We have financed our operations primarily through the private and public sale of common and preferred stock, loans, payments under licensing agreements, government research grants and capital leases. From inception through March 31, 2005, we have received aggregate gross proceeds of approximately $180.0 million from the issuance of common and preferred stock. In addition, through March 31, 2005, we have received approximately $51.1 million from license and service fees, royalties and research contracts. We also have received approximately $26.2 million from capital lease financing arrangements and approximately $13.2 million from other loans. Through March 31, 2005, we have acquired approximately $45.2 million of property and equipment. These assets were largely financed through capital lease financing arrangements and other loans.

We entered into a $5.0 million loan and security agreement with Comerica in September 2003, which was subsequently terminated with all outstanding principal and interest being repaid in April 2005 (See “Financing Activities” section above). Under the terms of the agreement, we were required to satisfy certain financial covenants, including a minimum cash balance and a minimum quick ratio, as defined. Due to the uncertainty surrounding future debt covenant compliance at December 31, 2004, we classified the Comerica debt as current in our condensed consolidated balance sheet as of December 31, 2004.

We have also entered into financing agreements (the Agreements) with Connecticut Innovations, Inc. (CII), one of our stockholders, to finance certain leasehold improvements and other costs associated with our facility expansion in New Haven. The Agreements provide for payments of principal and interest based on a 120-month

amortization, with final balloon payments due in March 2009 through June 2011. Borrowings under the Agreements are collateralized by the related leasehold improvements. Management believes that we are in compliance with all covenants under the Agreements as of March 31, 2005 and the Agreements do not contain any cross default provisions.

We operate in an environment of rapid change in technology and have substantial competition from companies developing genomic related technologies and offering molecular biology services. In addition to the normal risks associated with a business venture, there can be no assurance that our technologies and our molecular biology services offerings will be successfully used, that we will obtain adequate patent protection for our technologies or that any of our products will be commercially viable. We have incurred substantial losses to date, have an accumulated deficit of approximately $236.7 million as of March 31, 2005 and expect to incur substantial expenditures in the foreseeable future to fund our research, development and commercialization of our products and to maintain our molecular biology services.

We believe that our current cash and cash equivalents balance and the funds generated from operations will be sufficient to cover anticipated cash needs through at least the next 12 months, other than with respect to funds required for the clinical development of vilazodone. Our current business plan reflects continued initiatives to increase revenue, reduce cost of goods sold as a percentage of revenue, reduce research and development expenses and control selling, general and administrative costs. If we are unable to achieve revenue and cost targets within a reasonable range of our operating plan, we will need to raise additional funds through the public or private sale of our equity or debt securities or from other sources, in order to satisfy our projected cash needs. Furthermore, we are also reviewing various alternatives to financing our ongoing operations and meeting our obligations, including a potential reorganization, disposing of some of our assets, exploring strategic alternatives, such as a potential sale of the Company, developing strategic alliances and/or joint development arrangements. There is no assurance that we will be able to obtain sufficient financing on acceptable terms, if at all, or cure or waive any future non-compliance with the terms of our financing arrangements. On November 9, 2004, as part of our strategy to decrease our operating expenses, we reduced our workforce by approximately 10%. The majority of the workforce reductions occurred in research and development.

On November 19, 2004, we closed a private placement with certain institutional and other accredited investors for 3,550,294 shares of our common stock together with warrants to purchase an additional 3,550,294 shares of our common stock at $1.69 per share. We received proceeds of approximately $5.4 million net of issuance costs of approximately $580,000.

On April 21, 2005, we entered into a Note and Warrant Purchase Agreement with Xmark, pursuant to which, among other things, we issued the Note to Xmark in the aggregate principal amount of $4.5 million. The Note, which is payable on April 21, 2007, bears interest at 5% and is secured by substantially all of our assets, excluding, among other assets, our intellectual property. Under the terms of the Note, we are required to prepay the Note upon the occurrence of certain events including the sale of our assets, as defined. In addition, we issued Xmark warrants to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $2.25 per share. The price per share is subject to adjustment in certain circumstances while there is a balance outstanding under the Note on or after September 18, 2005 and we issue specified securities for less than $2.25 per share. The warrants also provide for an adjustment to the exercise price and number and type of securities purchasable upon exercise of the warrant in certain circumstances, including, without limitation, a split-up or combination of shares or a consolidation or merger where we are not the surviving entity. Concurrent with signing the Note, we terminated our Loan and Security Agreement with Comerica and repaid all outstanding principal and interest due to Comerica. As a result of these transactions, we have classified the Comerica debt as long-term in our condensed consolidated balance sheet as of March 31, 2005.

Cash and Cash Equivalents

At March 31, 2005, cash, cash equivalents and short-term investments totaled approximately $5.9 million compared to approximately $9.2 million at December 31, 2004. Our cash reserves are held in interest-bearing, high-grade corporate bonds and money market accounts.

Cash Flows

Cash used in operations was approximately $2.6 million in the three months ended March 31, 2005 compared with approximately $4.4 million for the same period in 2004. The cash used in operations for the three months ended March 31, 2005 resulted primarily from a net loss of approximately $3.1 million and a decrease of approximately $660,000 in accrued expenses, partially offset by approximately $1.3 million of non-cash charges for depreciation and amortization expense and stock-based compensation. The cash used in operations for the three months ended March 31, 2004 resulted primarily from a net loss of approximately $4.7 million and a decrease of approximately $1.4 million in accrued expenses, partially offset by approximately $1.8 million of non-cash charges for depreciation and amortization expense, stock-based compensation, non-cash research and development expense and the loss in the equity of an affiliate.

Cash used in investing activities was approximately $109,000 in the three months ended March 31, 2005 compared with cash provided by investing activities of approximately $2.2 million for the same period in 2004. During the three months ended March 31, 2005, we used approximately $98,000 million for the purchase of property and equipment. During the three months ended March 31, 2004, we used approximately $410,000 for the purchase of property and equipment and received net proceeds of approximately $2.7 million from the maturity of investments in marketable securities.

Cash used in financing activities was approximately $527,000 in the three months ended March 31, 2005 compared with approximately $514,000 for the same period in 2004. During the three months ended March 31, 2005, we used cash of approximately $445,000 for the repayment of long-term debt and approximately $104,000 for the payment of preferred stock dividends. During the three months ended March 31, 2004, we used cash of approximately $506,000 for the repayment of long-term debt.

Contractual Obligations

In April 2005, we entered into a Note and Warrant Purchase Agreement with Xmark, pursuant to which, among other things, we issued the Note to Xmark in the aggregate principal amount of $4.5 million (See “Financing Activities” section above). Concurrently, we terminated our Loan and Security Agreement with Comerica and repaid all outstanding principal and interest due to Comerica. As such, $2.6 million of long-term debt, including interest, shown in the contractual obligations table in our 2004 Annual Report on Form 10-K (File No. 000-30981) as due in fiscal 2005 is now due in fiscal 2006 and 2007.

Short-Term Funding Requirements

We believe that our existing cash reserves will be sufficient to fund our expected net losses, debt service obligations and capital expenditures for at least the next 12 months based upon our current activities. We are reviewing various alternatives to fund the development of vilazodone without utilizing our current resources.

We expect to continue to finance our operations from cash we received in October 2003 and June 2004 from the sale of our series A preferred stock and the related exercise of a warrant to purchase shares of our series A preferred stock, cash we received in November 2004 from our private placement of common stock, cash we received from our debt financing in April 2005 and future revenue from our proprietary programs and molecular biology services customers. Factors affecting our funding requirements are described below. In particular, if we are unsuccessful in marketing our proprietary programs and growing our molecular biology services revenue, we may not generate sufficient revenue to sustain our operations at planned levels. We expect to expend substantial funds to conduct research and development activities and other general and administrative activities. Our expenditures for these activities will include required payments under operating leases and long-term debt agreements and licensing, collaboration and service agreements. Capital expenditures are not currently expected to exceed $1.0 million for fiscal 2005 and 2006. We expect to fund our capital expenditures through our current cash and cash equivalents reserves and expect our capital expenditures to be for equipment used in our services business and in our research activities.

Long-Term Funding Requirements

In addition to our short-term funding requirements, for periods beyond 12 months, even if we market our proprietary programs and grow our molecular biology services revenue significantly, we may need to seek additional funding through public or private equity financings, debt financings or commercial customers. We cannot assure you that we will be able to obtain additional financing or new customers for our molecular biology services and our proprietary programs, or generate the increased revenue to support our operations.

Our cash requirements in both the short-term and the long-term could vary depending upon a number of factors, many of which may be beyond our control, including:

• our ability to obtain additional financing and our level of indebtedness;

• our ability to retain and find new customers for our proprietary programs;

• our ability to grow profitably our molecular biology services business;

• our ability to commercialize molecular tests;

• how we finance any clinical trials for our in-licensed compound, if at all;

• our success in entering into strategic alliances and/or joint development arrangements;

• the commercialization of intellectual property derived from our proprietary programs;

• the level of competition we face;

• acquisition costs or other non-recurring charges in connection with the acquisition of companies, products or technologies;

• our ability to maintain and develop our proprietary programs; and

• our ability to manage effectively our operating expenses and reduce costs.

If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities or seek additional financing through other arrangements. Any sale of additional equity or debt securities may result in additional dilution to our stockholders, and debt financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. We cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. In addition, we cannot incur indebtedness above certain levels or issue any capital stock or other equity securities having rights, preferences, privileges or priorities pari passu with or senior to the series A preferred stock without the vote or written consent of holders of at least 66-2/3% of the series A preferred stock then outstanding. If we are unable to obtain additional financing, we will be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. In addition, failure to obtain additional capital may preclude us from developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures.

Collaborative Research Agreements

In September 2004, we entered into a license, development and cooperation agreement with Merck pursuant to which we acquired an exclusive worldwide license from Merck to develop and commercialize vilazodone, a small molecule compound. We believe that previous preclinical and clinical studies of vilazodone provide a basis for further development of the product for use in the treatment of depressive illness. In light of published studies suggesting an association between antidepressant response and genetics, we intend to evaluate vilazodone in a Phase II clinical trial, which would include a pharmacogenomic characterization of patients suffering from depression. We believe that genetic markers predictive of drug response can be discovered, which could lead to a novel therapy targeting a population of patients suffering from depression, who will respond to the drug. We currently do not have sufficient resources to commence this Phase II clinical trial. We will need to secure additional sources of financing to meet our requirements under the Merck agreement and we are considering our options in this regard.

In consideration for the rights relating to vilazodone, we agreed to pay Merck an initial license fee and milestone payments upon the achievement of specified development, regulatory and sales milestones. Under the

Factors Affecting Future Operating Results

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For this purpose, statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of historical fact may be forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied. These important factors include our “critical accounting estimates” and the factors set forth below.

Risks Related to Our Need for Financing and Financial Results

We are an early stage company with a history of losses, and we expect to incur net losses for the foreseeable future such that we may never be profitable.

We have incurred substantial operating losses in every year since our inception. As of March 31, 2005, we had generated only minimal revenues from our proprietary programs and our molecular biology services. From inception through March 31, 2005, we had an accumulated deficit of approximately $236.7 million. Our losses to date have resulted principally from costs we incurred in the development and conduct of our proprietary programs and from general and administrative costs associated with operations.

We expect to devote substantially all of our resources for the foreseeable future to service our molecular biology services and proprietary programs customers and continue the development of our proprietary programs. We will need to generate significantly higher revenues and attract external capital in the form of debt or equity financing, or a third party collaboration, to fund our spending. Pharmaceutical and biotechnology companies are only beginning to use services such as ours in their drug and diagnostic development or marketing efforts and, accordingly, they may not choose to use our HAP Technology or our molecular biology services. We cannot be certain whether we will be able to attract external capital in the form of debt or equity financing, or a third party collaboration, because of significant uncertainties with respect to our ability to generate revenues from the sale of products and covenants with existing shareholders. As a result, even if we obtain additional financing, we expect to incur additional losses this year and in future years, and we may never achieve profitability.

Additional financing may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our ability to fund operations, repay debt and develop vilazodone and, thereby, negatively impact our value.

If we are unable to obtain additional financing, we will be required to delay, reduce the scope of, or eliminate one or more of our planned research, development and commercialization activities, which could harm our financial condition and operating results. In November 2004, we reduced our workforce by approximately 10%, and the majority of the workforce reductions occurred in our research and development department.

We may be forced to seek funds through arrangements with collaborators or others that require us to relinquish rights to certain of our technologies or therapeutic products, which we would otherwise pursue on our own, or grant licenses on terms that may not be favorable to us. For example, in September 2004, we entered into a license, development and cooperation agreement with Merck, pursuant to which we acquired an exclusive world-wide license to develop and commercialize vilazodone, a small molecule compound. We agreed to pay milestone payments upon the achievement of specified development, regulatory and sales milestones and royalties on all future product sales and a share of all sub-licensing income from any third party on the commercialization of vilazodone. Under the agreement, we are required to demonstrate that, by no later than July 22, 2005, we will have at least $8.0 million in financing or have shown the capacity to fund such levels of research and development activities in 2005 relating to vilazodone. If we are unable to meet this requirement, Merck can terminate the agreement and reacquire the compound. In addition, if the average closing price of our common stock at the time of the respective milestone payment is below $2.25 per share, we will be required to make the milestone payments to Merck in cash rather than in shares of our common stock. If Merck and its affiliates’ aggregate ownership of our common stock would exceed 19.9% of the number of shares of our

common stock then outstanding, we would also be required to make payments in cash rather than in shares of our common stock. We will need to seek alternate means to finance the development of vilazodone or raise additional capital to do so. We do not currently have sufficient resources to meet our obligations with respect to vilazodone.

Any sale of additional equity or debt securities may result in additional dilution to our stockholders, and such financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. We cannot be certain that additional public or private financing will be available in amounts or on terms acceptable or favorable to us, if at all. In addition, we cannot incur indebtedness above certain levels or issue any capital stock or other equity securities having rights, preferences, privileges or priorities pari passu with or senior to our series A preferred stock without the vote or written consent of holders of at least 66-2/3% of the series A preferred stock then outstanding. Failure to obtain additional capital may preclude us from developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures.

Our redemption obligations under our series A preferred stock could have a material adverse effect on our financial condition.

Under the terms of our series A preferred stock, we are required, unless the holders of at least 66-2/3% of our outstanding series A preferred stock elect otherwise, to redeem all then outstanding shares of our series A preferred stock if one or more of the following events occurs:

• our common stock is delisted from The NASDAQ National Market;

• we issue shares of our common stock or securities convertible into common stock, with a purchase price of less than $2.25 per share, other than in limited circumstances;

• we breach any representation or warranty contained in the series A purchase agreement or the registration rights agreement that has a material adverse effect on the holders of our series A preferred stock;

• we breach any covenant or fail to perform any of our obligations under the series A purchase agreement or the registration rights agreement, each entered into in connection with the sale of our series A preferred stock, that has a material adverse effect on the holders of our series A preferred stock;

• an involuntary case is commenced against us under any bankruptcy, insolvency or other similar law or we commence a voluntary case under any bankruptcy, insolvency or other similar law or consent to any receivership, liquidation or assignment for the benefit of creditors;

• we default under any agreement entered into on or after October 7, 2003, under which we have incurred indebtedness for borrowed money in excess of $500,000; and

• we, prior to October 29, 2008, liquidate, dissolve or windup, transfer all or substantially all of our assets or are party to a merger or other change in control transaction, in which our stockholders do not own a majority of our outstanding voting securities after such transaction.

If we are required to redeem our series A preferred stock due to any of the foregoing events, we are required to pay each holder of our series A preferred stock the original purchase price, plus an amount equal to the dividends that would otherwise have accrued and been payable on such shares through October 29, 2008 that have not otherwise been paid as of the redemption date. As of March 31, 2005, the aggregate redemption price we would be required to pay is approximately $11.1 million. As of March 31, 2005, we had aggregate cash and cash equivalents of approximately $5.9 million.

In addition, the holders of at least 66-2/3% of the outstanding shares of our series A preferred stock may elect to require us to redeem all outstanding shares of our series A preferred stock for the original purchase price, plus all accrued but unpaid dividends as of the redemption date, on either October 29, 2006, 2007 or 2008.

A redemption of the series A preferred stock would deplete the cash we have available to fund operations, research and product development, capital expenditures and other general corporate purposes. In addition, we have incurred net losses in the past and expect to incur losses in the future, which may impair our ability to generate the cash required to meet our obligations under our series A preferred stock. If we cannot generate sufficient cash to meet these obligations, we will be required to incur additional indebtedness or raise additional capital, which would negatively impact our stockholders.

In addition, under the terms of the Note in the aggregate principal amount of $4.5 million issued in a private placement on April 21, 2005, a redemption of the series A preferred stock would result in an event of default under the Note. Upon the occurrence and during the continuance of such an event of default, the outstanding principal amount of the Note will bear interest at a maximum rate of 15% per annum.

The purchaser of our series A preferred stock owns a substantial portion of our capital stock, which may afford the purchaser significant influence over our affairs.

As of March 31, 2005, the holder of our series A preferred stock, together with its affiliates, held or had the right to acquire and/or vote 14.07% of our outstanding common stock, assuming the conversion of series A preferred stock to common stock and the exercise of a common stock purchase warrant, including shares of our common stock which the holder previously purchased in the open market. The series A holder has agreed not to convert its series A if such conversion would cause the holder to beneficially own in excess of 9.99% of our common stock. Nevertheless, this stockholder has significant influence over our ability to offer securities for sale at a purchase price of less than $2.25 per share, incur additional indebtedness and affect any change in control of the Company that may be favored by other stockholders. Additionally, this stockholder could otherwise exercise significant influence over all corporate actions requiring stockholder approval, including the approval of some mergers and other significant corporate transactions, such as a sale of substantially all of our assets or the defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders. Consequently, this stockholder may approve a transaction that, in its judgment, enhances the value of its investment, but which nonetheless may diverge from the interests of our other stockholders.

The agreements and instruments governing the rights and preferences of our series A preferred stock impose restrictions on our business and limit our ability to undertake certain corporate actions, including with respect to financings.

Our amended and restated certificate of incorporation, which we refer to as our charter, and the series A purchase agreement govern the terms of our series A preferred stock and impose significant restrictions on our business. These restrictions may limit our ability to obtain additional financing, operate our business and to take advantage of potential business opportunities as they arise. Without the consent of the holders of at least 66-2/3% of the outstanding shares of our series A preferred stock, we cannot:

• alter or change the rights, preferences or privileges of our series A preferred stock, including any increase in the number of authorized shares of our series A preferred stock;

• issue shares of our common stock, or securities convertible into shares of our common stock, with a purchase price of less than $2.25 per share, other than in limited circumstances;

• incur more than $9,000,000 of indebtedness at any time;

• create, incur or assume specified liens; or

• declare or pay dividends, redeem stock or make other distributions to stockholders, other than in limited circumstances.

Events beyond our control, including prevailing economic, financial and industry conditions, may affect our ability to comply with these restrictions. In addition, the holder of our series A preferred stock has the right to participate in any of our future capital raising transactions. The existence of this right may substantially reduce our ability to establish terms with respect to, or enter into, any financing with parties other than the series A preferred stockholder. The terms of any additional financing, which we may enter into, may impose constraints on our ability to operate our business as we deem appropriate. These restrictions and covenants could limit our ability to take advantage of financings, mergers and acquisitions or other corporate opportunities, which could adversely affect our business and financial condition and your investments in our common stock.

The issuance and sale of our securities could have the effect of substantially diluting the interests of our current stockholders.

In connection with the Note in the aggregate amount of $4.5 million issued in a private placement on April 21, 2005, we issued Xmark warrants to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $2.25 per share. The price per share is subject to adjustment in certain circumstances while there is a balance outstanding under the Note on or after September 18, 2005 and we issue specified securities for less than $2.25 per share. The warrants also provide for an adjustment to the exercise price and number and type of securities purchasable upon exercise of the warrant in certain circumstances, including, without limitation, a split-up or combination of shares or a consolidation or merger where we are not the surviving entity. In connection with our private placement in November 2004, we issued warrants to purchase an aggregate of 3,550,294 shares of our common stock at an exercise price of $1.69 per share. On October 29, 2003, we issued and sold an aggregate of 270,000 shares of our series A preferred stock and granted the purchaser of such shares a warrant to purchase an additional 190,000 shares of our series A preferred stock at $22.50 per share, which the purchaser exercised on June 30, 2004. In connection with the exercise of the warrant, we granted an affiliate of the series A holder a warrant to purchase 261,500 shares of our common stock at an exercise price of $4.17 per share. Each share of our series A preferred stock is currently convertible into ten shares of our common stock. Consequently, on an as-converted and as-exercised basis, an aggregate of 4,861,500 shares of our common stock may be issued to the series A purchaser or its affiliate. Any issuance of shares of our common stock upon conversion of shares of our series A preferred stock, or upon exercise of outstanding warrants, could have the effect of substantially diluting the interests of our current stockholders, as well as the interests of holders of our outstanding options and warrants. As of March 31, 2005, we had outstanding options and warrants exercisable for an aggregate of 9,964,637 shares of our common stock, which does not include the warrant to purchase an aggregate of 2,000,000 shares of our common stock issued to Xmark in April 2005.

Moreover, any sale of the shares of our common stock issued upon conversion of the series A preferred stock, as well as any of the outstanding shares of our common stock issued upon exercise of options or warrants, into the public market could cause a decline in the trading price of our common stock. In financing transactions, for compensatory purposes or in other types of transactions, we may issue additional equity securities, including options and warrants, that could dilute the interests of our current and future stockholders.

Our operating results may fluctuate significantly, and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline of our common stock price.

Our operating results have fluctuated in the past and we expect they will fluctuate in the future. These fluctuations could cause our common stock price to decline. Some of the factors that could cause our operating results to fluctuate include:

• our ability to pay our obligations as they become due;

• recognition of non-recurring revenue due to receipt of license fees, achievement of milestones, completion of contracts or other revenue;

• demand for, and market acceptance of, our molecular biology services and our proprietary programs;

• timing of the execution of agreements relating to our molecular biology services and proprietary programs, and other material contracts;

• our dependence on a limited number of customers for a substantial portion of our revenue;

• our competitors’ announcements or introduction of new products, services or technological innovations;

• acquisition costs or other non-recurring charges in connection with the acquisition of companies, products or technologies;

• our ability to control operating expenses;

• disputes regarding patents or other intellectual property rights;

Risks Related to Commercialization and Development

We currently rely on a limited number of customers for a substantial portion of our revenue. As a result, our revenues may fluctuate based on the buying patterns of our customers, and the loss of one major customer or our inability to secure additional significant customers, during a given period, would have a material adverse effect on our business and operating results.

We are dependent upon a limited number of customers for substantially all of our revenue. In the three months ended March 31, 2005, one of our customers accounted for 20% of our revenues. Our reliance on a small number of customers could cause our revenues to fluctuate from quarter to quarter, based on the buying patterns of these customers. For example, we revised our guidance for our annual revenue downward in October 2004, primarily as a result of a shift in the timing of certain anticipated contracts and the receipt of samples associated with some of these contracts. If we lose and are not able to replace customers that provide us with significant revenues, it could have a material adverse effect on our revenues and on our business in general and could cause volatility or a decline in our stock price. In addition, if any of these customers fails to pay us on a timely basis, or at all, our financial position and results of operations could be materially and adversely affected.

To generate significant revenue, we must obtain additional customers for our molecular biology services and our proprietary programs.

Our strategy depends on obtaining additional customers for our molecular biology services and entering into new agreements with pharmaceutical and biotechnology companies for our HAP Technology and our other proprietary programs. Our contracts for our molecular biology services and with many of our HAP Technology customers are for specific limited-term projects. We may not be successful in obtaining a sufficient number of new customers for our molecular biology services, additional customers for our HAP Technology, or in obtaining significant customers for our other proprietary programs to replace our current customers and projects. If we are unsuccessful in finding such new customers, we may never generate sufficient revenue to sustain our operations. In addition, we expect that some of our future HAP Technology collaborations, like some of our current HAP Technology collaborations, will be limited to specific, limited-term projects or that some of these collaborations may not be renewed. Accordingly, we must continually obtain new customers to be successful. To date, the integration of pharmacogenomics into drug development and marketing has not achieved widespread market acceptance.

We may need to establish collaborative relationships in order to succeed.

In order to satisfy our obligations under our license, development and cooperation agreement relating to vilazodone, we will likely need to enter into a collaborative relationship with a third party. We face significant competition in seeking appropriate collaborators. Moreover, these arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to identify potential collaborators and establish collaborative relationships or other alternative arrangements, especially since we do not have experience with these types of collaborations.

Reliance on collaborative relationships poses a number of risks, including the following:

• we cannot effectively control whether a collaborator will devote sufficient resources to a program or product;

• disputes may arise in the future with respect to the ownership of rights to technology developed with a collaborator;

• disagreements with a collaborator could delay or terminate the research, development or commercialization of products, or result in litigation or arbitration;

• contracts with a collaborator may fail to provide sufficient protection;

• we may have difficulty enforcing the contracts, if a collaborator fails to perform;

• collaborators have considerable discretion in electing whether to pursue the development of any additional drugs and may pursue technologies or products, either on their own or in collaboration with our competitors; and

• collaborators with marketing rights may choose to devote fewer resources to the marketing of our products than they do to products that they develop.

Given these risks, even if we are able to identify a potential collaborator and negotiate and enter into a collaborative arrangement, it is possible that any collaborative arrangement into which we enter may not be successful. Failure of our efforts could cause us to breach covenants in our license agreement relating to vilazodone, delay our drug development or impair commercialization of our products. In particular, we must demonstrate to Merck’s satisfaction, by no later than July 22, 2005, that we will have the financial resources to fund the anticipated budget for research and development activities relating to vilazodone for 2005. We will likely not be able to satisfy this requirement, or other milestone obligations with respect to vilazodone, unless we obtain significant additional funding or enter into a collaboration arrangement with a third party.

Our proprietary programs may not allow our commercial customers to develop commercial products or to increase sales of their marketed products.

We developed our HAP Technology and other proprietary programs on the assumption that information about gene variation and gene variation associated with drug response may help drug development professionals better understand the drug response of particular populations and complex disease processes. Although the pharmaceutical and biotechnology industries are increasing their use of genomics in analyzing drug response and diseases, we are aware of only two successful drug program applying genomics.

We discover HAP Markers for pharmaceutically relevant genes. This information may not prove to be superior to genomic variation information discovered by our competitors or to genomic information available in public databases. Furthermore, pharmaceutical and biotechnology companies may not choose our HAP Technology over competing technologies.

Our DecoGen Informatics System may also be less effective than we expect or may not allow us or our commercial customers to determine a correlation between drug response and genomic variation. Furthermore, even if our customers or we are successful in identifying such a correlation, our customers may not be able to develop or sell commercially viable products, nor may our customers be able to increase the sales of their marketed products using this correlation. Accordingly, our HAP Markers and HAP Technology may not improve the development, marketing and prescribing of drugs or the development and marketing of diagnostics developed by our HAP Technology customers and proprietary program customers.

We may be unable to develop or commercialize our proprietary programs if we cannot establish additional customers, and we may depend on our customers to develop or to co-develop products.

Part of our current and future revenue will depend on payments from our current proprietary program customers and our future proprietary program customers, if any, for either the new products they may develop or for increased sales of their existing products, made possible through the use of our HAP Technology. If we are unable to attract new proprietary program customers, we may never generate sufficient revenue to sustain our operations.

Our customers for certain of our proprietary programs may be responsible for pre-clinical study and clinical development of therapeutic and diagnostic products and for regulatory approval, manufacturing and marketing of any product or enhanced marketing claims that result from the application of our proprietary programs. Our current agreements with these customers allow them significant discretion in pursuing these activities and future agreements, if any, may allow similar discretion. We cannot control the amount and timing of resources that any such current or potential customers will devote to our programs or potential products. Our current proprietary program arrangements and our future proprietary program arrangements, if any, may also have the effect of limiting the areas of research or commercialization that we may pursue either alone or with others. Because part of our revenue could be dependent on the successful commercialization or development of our customers’ products, if, for any reason, a proprietary program customer delays or abandons its development or commercialization of a product developed using our HAP Technology, we may receive reduced royalty or other payments or no royalty or other payments at all.

We invest considerable amounts of time, effort, and money to license our HAP Technology and proprietary programs and, if we fail in these licensing efforts, we may not generate sufficient revenue to sustain our operations.

Our ability to obtain customers for our proprietary programs will depend in significant part upon the pharmaceutical and biotechnology industries’ acceptance that our HAP Technology can help accelerate or improve their drug and diagnostic development and marketing efforts. To achieve market acceptance, we must continue to educate the pharmaceutical and biotechnology industries and the public in general as to the potential benefits of our HAP Technology. Most importantly, we must convince the research and development, clinical and marketing departments of pharmaceutical and biotechnology companies that our HAP Technology can accelerate and improve the processes for developing, marketing and prescribing drugs and for developing and marketing diagnostics, and that our proprietary programs will be commercially viable. If we fail to gain this acceptance, we may never generate sufficient revenue to sustain our operations. We may expend substantial funds and management effort to market our proprietary programs without any resulting revenue.

If we do not successfully distinguish and commercialize our proprietary programs, we may be unable to compete successfully with our competitors or to generate revenue significant to sustain our operations.

Numerous entities are attempting to identify genomic variation predictive of specific diseases and drug response and to develop products and services based on these discoveries. We face competition in these areas from pharmaceutical, biotechnology and diagnostic companies, academic and research institutions and government and other publicly funded agencies, both in the United States and abroad, most of which have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than do we.

These competitors may discover, characterize or develop important technologies applying genomics before our customers or us for our proprietary programs that are more effective than those technologies, which our customers or which we develop for our proprietary programs. Additionally, these competitors may obtain regulatory approval for their drugs and diagnostics more rapidly than our customers for our proprietary programs do, any of which could limit our ability to market effectively our proprietary programs.

Some companies and governments are marketing or developing a number of databases and informatics tools to assist participants in the healthcare industry and academic researchers in the management and analysis of genomic data. Entities such as Perlegen Sciences and the International HapMap Project have developed databases containing gene sequence, genomic variation or other genomic information and are marketing their data to pharmaceutical and biotechnology companies or are making their databases freely available to the public. In addition, numerous pharmaceutical and biotechnology companies, such as GlaxoSmithKline plc, either alone or in collaboration with our competitors, are developing genomic research programs that involve the use of information that can be found in these databases. Furthermore, companies, such as deCODE genetics, Inc., have technologies for using genomic variation in diagnostics and in the drug development process and have collaborations with companies employing these technologies.

Genomic technologies have undergone, and are expected to continue to undergo, rapid and significant change. Our future success will depend in large part on maintaining a competitive position in the genomics field. Others may rapidly develop new technologies that may result in our molecular tests or technologies becoming obsolete before we recover the expenses that we incur in connection with the development of these products. Our proprietary programs could become obsolete if our competitors offer less expensive or more effective drug discovery and development technologies, including technologies that may be unrelated to genomics.

Our FAMILION Test may not gain market acceptance.

The market for genetic tests is relatively undeveloped. We are marketing our FAMILION Test to physicians, who did not previously have a genetic test available for cardiac channelopathies. The success of our test depends on its acceptance by the medical community, patients and third-party payers as being medically useful. If we are not able to gain market acceptance for our test, we may not be able to generate sufficient revenue to sustain our operations.

Risks Related to Our Intellectual Property

If we are unable to prevent others from the unauthorized use of, or are unable to defend their use of, our patents, trade secrets or know how, we may not be able to operate our business profitably.

Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The issuance of a patent does not guarantee that it is valid or enforceable. Thus, even if we obtain patents, they may be challenged, narrowed, invalidated or unenforceable against third parties, which could limit our ability to stop competitors from marketing similar technologies or products, or limit the length of term of patent protection we may have for any of our technologies or products. Changes in patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Because patent applications that were filed prior to November 29, 2000 in the United States are confidential until patents issue, third parties may have filed patent applications for technology covered by our pending patent applications without us being aware of those applications, and our patent applications may not have priority over any patent applications of others. We are aware that there are other firms and individuals who have discovered, or are currently discovering, information similar to the information we are discovering, who may have filed, and in the future are likely to file, patent applications that are similar or identical to our proprietary program patent applications. In addition, some interest groups are lobbying for restrictions on patenting of genetic tests.

Further, a patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. A third party may sue us for infringing on its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued to us or to determine the scope and validity of third party proprietary rights. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s focus from our core business concerns. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with reasonable security measures, including confidentiality agreements signed by our employees, academic collaborators and consultants that provide that all confidential information developed or made known to others during the course of the employment, consulting or business relationship will be kept confidential, except in specified circumstances. Agreements with employees, consultants and collaborators generally provide that all inventions conceived by the individual while employed by us are our exclusive property. If employees, consultants or collaborators do not honor these agreements, we may not have adequate remedies for breach. Furthermore, our trade secrets may otherwise become known or be independently discovered by competitors.

If any party should successfully claim that the creation or use of our proprietary programs infringes upon their intellectual property rights, in addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license on unfavorable terms. Moreover, any legal action threatened or commenced against us or any of our proprietary program customers claiming damages or seeking to enjoin commercial activities relating to the affected test and processes could, in addition to subjecting us to potential liability for damages, require us or our current and future customers of our proprietary programs, if any, to obtain a license in order to continue to manufacture or market the affected test and processes. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, some licenses may be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to market effectively some of our proprietary programs, which could limit our profitability and possibly prevent us from generating revenue sufficient to sustain our operations.

Regulatory Risks

Regulatory oversight of our proprietary programs and public opinion regarding ethical issues surrounding the use of genetic information may adversely affect our ability to market our products and services.

Currently, there is limited FDA regulation of genetic tests. The Secretary’s Advisory Committee on Genetic Testing, an advisory panel to the Secretary of the U.S. Department of Health and Human Services, has recommended that the FDA expand its regulation of genetic testing to require FDA approval for all new genetic tests and labeling of genetic tests. If the FDA adopts this recommendation, it may require that we, or our customers, apply for FDA approval as a prerequisite to marketing genetic tests that incorporate our intellectual property. If the FDA were to deny any application of this kind, it could adversely affect our business and we may be unable to generate sufficient revenue to sustain our operations.

The FDA has twice required that a physician must have genomic variation information determined about a patient before the doctor prescribes a drug. In April 2005, the FDA issued guidance that encourages drug and biologic developers to conduct pharmacogenomic tests during drug development and clarified how the FDA will evaluate the resulting data. The guidance provides specific criteria and recommendations on the submission of pharmacogenomic data in connection with Investigational New Drug Applications, New Drug Applications and Biological License Applications. The guidance includes information on the type of data needed and how the FDA will or will not use such data in regulatory decisions. The FDA asked for voluntary submissions of research information in order to gain experience as the field of pharmacogenomics evolves. The FDA advised that the agency would not use information from voluntary reports for regulatory decisions on the drug or biologic, with which the voluntary data is associated. In addition, the FDA held a workshop in April 2005 to discuss its guidance and gain further industry comment on implications of voluntary data submissions and joint development of drug-diagnostic combination products. Our success will depend, in part, on how rapidly the pharmaceutical and biotechnology industry implements the guidance and, accordingly, the validity of our test and services as a basis for identifying genomic variation and for correlating drug response with genomic variation. Without this implementation by the pharmaceutical and biotechnology industry, we may be unable to market effectively any test we may have, as well as any of our services, and we may not generate sufficient revenue to sustain our operations.

Within the field of personalized health and medicine, governmental and other entities may enact patient privacy and healthcare laws and regulations that may limit the generation and use of genomic variation data. To the extent that these laws and regulations limit the use of our products and services or impose additional costs on our customers, we may be unable to market effectively our proprietary programs, and we may not generate sufficient revenue to sustain our operations.

Additionally, public opinion on ethical issues related to the confidentiality and appropriate use of genetic testing results may influence governmental authorities to call for limits on, or regulation of the use of, genetic testing. In addition, governmental authorities or other entities may call for limits on, or regulation on the use of, genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. The occurrence of any of these events could reduce the potential markets for our products and services, which could prevent us from generating sufficient revenue to sustain our operations.

Furthermore, we are subject to laws and regulations as a provider of information that a doctor can use to make a therapeutic decision. To the extent that these laws and regulations restrict the sale of our products and services or impose other costs, we may be unable to provide our products and services to our customers on terms sufficient to recover our expenses.

If our customers or we do not seek, or do not receive, marketing approval for products developed, if any, from our proprietary programs, we may receive delayed royalty or other payments or no royalty or other payments at all.

Any new drug, biologic, or new drug or biologic indication we or our customers develop using genetic markers from our proprietary programs must undergo an extensive regulatory review process in the United States and other countries before a new product or indication of this kind could be marketed. This regulatory process can take many years, requires substantial expense and is uncertain as to outcome. Changes in FDA policies and the policies of similar foreign regulatory bodies can prolong the regulatory review of each new drug or biologic license application or prevent

Additional Risks Related to Our Business

We depend on third-party products and services and limited sources of supply for our high-throughput genotyping laboratory.

We rely on outside vendors to supply certain software, products and materials used in our laboratories. Some of these products and materials are obtained from a single supplier or a limited group of suppliers. For example, we have a written agreement with Sequenom, Inc., pursuant to which it is contractually the sole provider of silicon chips for one-time use on their MassARRAY^TM System, which is our primary genotyping platform in our New Haven facility. Under the terms of the agreement and subject to specific conditions, we have the authority to reuse these chips should Sequenom be unable to supply new chips to us. While we believe that we could prepare for reuse the requisite supply of chips without unreasonable cost or delay, we may be unable to do so. We have no other written long-term supply agreements with our suppliers. Our reliance on outside vendors generally and a sole or a limited group of suppliers in particular involves several other risks, including:

• the inability to obtain an adequate supply of required software, products and materials due to capacity constraints, product defects, a discontinuance of a product by a supplier or other supply constraints;

• reduced control over quality and pricing of software, products and materials; and

• delays and long lead times in receiving software, products, or materials from vendors.

If we fail to maintain our computer hardware, software and related infrastructure, we could experience loss of, or delay in, revenue and market acceptance.

Because our business requires manipulating and analyzing large amounts of data, we depend on the continuous, effective, reliable and secure operation of our computer hardware, software and related infrastructure. To the extent that any of these elements malfunction, we will experience reduced productivity. We protect our computer hardware through physical and software safeguards. However, our computer hardware is still vulnerable to fire, weather, earthquake, or other natural disaster and power loss, telecommunications failures, physical or software break-ins and similar events. In addition, the software and algorithmic components of our DecoGen Informatics System are complex and sophisticated, and as such, could contain data, design or software errors that could be difficult to detect and correct. Users of our system may find software defects in current or future tests. We have developed a proprietary Laboratory Information Management System (LIMS) to operate our high-throughput genotyping facilities. Software defects in the LIMS could adversely effect our operations and have a significant impact on our ability to generate revenue from this facility. If we fail to maintain the necessary computer capacity and data to support our computational needs and our customers’ drug and diagnostic discovery and development efforts, we could experience a loss in revenue, or a delay in receiving revenue and a delay in obtaining market acceptance for our technology.

The current labor markets are very competitive, and our business may suffer if we are not able to hire and retain key personnel.

Our future success depends on the retention of our key technical, marketing and executive management to assist in formulating our business strategies. The loss of the services of any of these individuals could have a material adverse effect on our product development and commercialization efforts. In addition, research, product development and commercialization may require additional skilled personnel. Competition for qualified personnel in the technology area is intense, particularly given the competition among biotechnology, pharmaceutical and health-care companies, universities and non-profit research institutions for experienced scientists. In addition, and we operate in geographic locations where labor markets are particularly competitive, including New Haven, Connecticut; Morrisville, North Carolina; Houston, Texas; and Takeley, England, where our service facilities are located. If we are unable to attract and retain a sufficient number of qualified personnel on acceptable terms, our business, financial condition and results of operations could be seriously harmed. The inability to retain and hire qualified personnel could also hinder the future expansion of our business.

PART II - Other Information

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information about purchases made by us of our common stock for each month included in our first quarter:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

1/1/2005-1/31/2005	—		—		—	—

2/1/2005-2/28/2005	5,040	(1)	$	0.001	—	—

3/1/2005-3/31/2005	—		—		—	—

Total	5,040	(1)	$	0.001	—	—

(1) The 5,040 shares are shares of our common stock repurchased pursuant to restricted stock agreements that we had entered into with certain of our employees.

Item 6 – Exhibits.

See Index to Exhibits attached hereto, which Exhibit Index is incorporated herein by reference.

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For The Quarterly Period Ended March 31, 2005

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		06-1338846
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Item 4 – Controls and Procedures

PART II – OTHER INFORMATION

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Item 6 – Exhibits

Signature

	GENAISSANCE PHARMACEUTICALS, INC.


Date: May 5, 2005	By:	/s/ Ben Kaplan
	Ben Kaplan Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit No.		Description of Document

31.1		Certification pursuant to Rules 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification pursuant to Rules 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1		Certification pursuant to 18 U.S.C. Section 1350.

32.2		Certification pursuant to 18 U.S.C. Section 1350.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For The Quarterly Period Ended March 31, 2005

Delaware

06-1338846

Notes to Unaudited Condensed Consolidated Financial Statements

Overview

Critical Accounting Policies and Estimates